Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended July 31, 2015

OR

o

Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from to .

COMMISSION FILE NUMBER 000-51825

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

Minnesota

41-2002393

(State or other jurisdiction of organization)

(I.R.S. Employer Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

(507) 793-0077

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ýYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý

(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

As of September 14, 2015, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

The accompanying unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated audited financial statements for the year ended October 31, 2014, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for any other quarter or for the fiscal year.

Nature of Business

The Company is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains with solubles, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. The Company's plant has an approximate nameplate production capacity of 50 million gallons per year. On July 10, 2015, the Minnesota Pollution Control Agency approved a major amendment to the Company's air emission permit which increased its permitted production capacity from 59.9 million gallons to approximately 72.3 million gallons per year of undenatured ethanol on a twelve month rolling sum basis. Additionally, the Company, through a majority owned subsidiary, operates a natural gas pipeline that provides natural gas to the Company's ethanol production facility and other customers.

Principles of Consolidation

The financial statements as of July 31, 2015 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company, LLC, collectively the "Company". HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC ("Agrinatural"). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% noncontrolling interest identified separately in the accompanying Condensed Consolidated Balance Sheets and Statements of Operations. All significant intercompany balances and transactions are eliminated in consolidation.

Accounting Estimates

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, the analysis of impairment of long-lived assets and valuation of commodity derivative instruments, inventory, and inventory purchase and sales commitments. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Noncontrolling Interest

Amounts recorded as noncontrolling interest on the balance sheets relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 5 years expiring October 31, 2016, with two automatic renewal options for five year periods. On July 1, 2014, the Company entered into an amendment of its natural gas transportation agreement dated May 13, 2011 with Agrinatural, in which the Company agreed on an early exercise of one of the two automatic five-year term renewals thereby extending the term of the transportation agreement to October 31, 2021.

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. Title is generally assumed by the buyer at the Company’s shipping point.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers' grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75%-85% of total revenues and corn costs average 65%-85% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

3. INVENTORY

Inventory consisted of the following:

July 31, 2015

October 31, 2014

(unaudited)

Raw materials

$

1,546,830

$

2,462,754

Work in process

743,362

791,490

Finished Goods

3,064,542

1,072,646

Critical Parts

1,117,787

860,377

Total

$

6,472,521

$

5,187,267

The Company performs a lower of cost or market analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or market analysis, the Company did not record a lower of cost or market adjustment on inventories for the three or nine month periods ended July 31, 2015 or 2014.

4.DERIVATIVE INSTRUMENTS

As of July 31, 2015, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 4,575,000 bushels that were entered into to hedge forecasted corn purchases through December 2016. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

The following tables provide details regarding the Company’s derivative instruments at July 31, 2015, none of which are designated as hedging instruments:

Balance Sheets location

Assets

Liabilities

Corn contracts

Commodity derivative instruments

$

1,072,650

$

—

As of October 31, 2014, the total notional amount of the Company's outstanding corn derivative instruments was approximately 2,790,000 bushels that were entered into to hedge forecasted corn purchases through July 2015. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

The following tables provide details regarding the Company’s derivative instruments at October 31, 2014, none of which are designated as hedging instruments:

Balance Sheets location

Assets

Liabilities

Corn contracts

Commodity derivative instruments

$

437,500

$

—

The following tables provide details regarding the gains and (losses) from Company’s derivative instruments in its consolidated statements of operations, none of which are designated as hedging instruments:

Statements of

Three Months Ended July 31,

Nine Months Ended July 31,

Operations Locations

2015

2014

2015

2014

Corn contracts

Cost of goods sold

$

749,449

$

(125,461

)

$

752,851

$

206,744

As of July 31, 2015 and October 31, 2014, the Company had approximately $161,000 and $264,000, respectively, of cash collateral (restricted cash) related to corn derivatives held by a broker.

5. FAIR VALUE

The following table provides information on those derivative assets measured at fair value on a recurring basis at July 31, 2015:

Fair Value Measurement Using

Financial Assets:

Carrying Amount in Balance SheetJuly 31, 2015

Quoted Prices in Active Markets(Level 1)

Significant Other Observable Inputs(Level 2)

Significant unobservable inputs(Level 3)

Commodity derivative instruments

$1,072,650

$1,072,650

$—

$—

The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2014:

Fair Value Measurement Using

Financial Assets:

Carrying Amount in Balance SheetOctober 31, 2014

Quoted Prices in Active Markets(Level 1)

Significant Other Observable Inputs(Level 2)

Significant unobservable inputs(Level 3)

Commodity derivative instruments

$437,500

$437,500

$—

$—

The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.

The Company has a revolving term loan with a lender initially totaling $28,000,000. Under the terms of the credit facility, the revolving term loan commitment declines by $3,500,000 annually, starting March 1, 2015 and continues each anniversary thereafter until maturity. Therefore, the amount available on this facility at July 31, 2015 was $24,500,000. Amounts borrowed by the Company under the revolving term loan and repaid or prepaid may be re-borrowed at any time prior to the March 1, 2022 maturity date. Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate. The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The Company also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum. The revolving term loan is subject to a prepayment fee for any prepayment on the term loan prior to July 1, 2016 due to refinancing. The credit facility contains customary covenants. The loan is secured by substantially all of the Company assets including a subsidiary guarantee. The outstanding balance on the revolving term loan totaled approximately $4,367,110 and $0 at July 31, 2015, and October 31, 2014, respectively. The interest rate on the revolving term loan was 3.44% and 3.41% at July 31, 2015, and October 31, 2014, respectively.

As part of the credit facility closing, the Company entered into an administrative agency agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the AgStar loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for AgStar with respect to the credit facility.

In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, the Company and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, the Company entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, the Company pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to the Company if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of July 31, 2015 and October 31, 2014, there was a total of $2.1 million and $2.3 million, respectively, in outstanding water revenue bonds. The Company classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

Estimated annual maturities of debt at July 31, 2015 are as follows based on the most recent debt agreements:

2015

$

710,383

2016

$

404,169

2017

$

336,341

2018

$

322,803

2019

$

318,253

After 2019

$

4,857,147

Total long-term debt

$

6,949,096

7. COMMITMENTS AND CONTINGENCIES

Forward Contracts

On July 31, 2015, the Company had cash and basis contracts for forward corn purchase commitments for approximately 5.9 million bushels for deliveries through May 2016.

At July 31, 2015, the Company had forward contracts to sell approximately $3,458,000 of ethanol for various delivery periods from August 2015 through September 2015 which approximates 25% of its anticipated ethanol sales during that period.

At July 31, 2015, the Company had forward contracts to sell approximately $2,028,000 of distillers' grains for delivery through September 2015 which approximates 45% of its anticipated distillers' grain sales during that period.

At July 31, 2015, the Company had natural gas agreements with a minimum purchase commitment of approximately 1.6 million MMBTU per year until April 2016. At July 31, 2015, the Company had no forward contracts to buy natural gas.

Construction in Progress

On July 31, 2015, the Company placed a purchase order with an unrelated party for a new regenerative thermal oxidizer and made a down payment on the equipment of approximately $375,000 to secure the order. The total commitment approximates $1.9 million and is expected to be completed during the latter part of fiscal year 2016.

8. MEMBERS’ EQUITY

The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our Board of Governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

The Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding at both July 31, 2015 and October 31, 2014.

In December 2014, the Board of Governors declared a cash distribution of $0.12 per unit, or approximately $9,352,000. The distribution was paid in January 2015.

9. LEASES

The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for these leases was approximately $525,000 and $1,572,000 for the three and nine months ended July 31, 2015, respectively, and approximately $503,000 and $1,327,000 for the three and nine months ended July 31, 2014, respectively.

Based on the growth of the Company’s natural gas pipeline subsidiary during the fourth quarter of fiscal 2014, the Company has determined they have two operating segments. The Company groups its operations into the following two business segments:

Ethanol Production

Ethanol and co-product production and sales

Natural gas pipeline

Ownership and operations of natural gas pipeline

Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Segment income or loss does not include any allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.

The following tables summarize financial information by segment and provide a reconciliation of segment revenue, contribution to operating income, and total assets:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three and nine months periods ended July 31, 2015, compared to the same periods of the prior fiscal year. This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in Item 1 of this report and the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2014.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements. You can identify forward-looking statements by terms such as "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "potential", "predicts", "projects", "should", "will", "would", and similar expressions intended to identify forward-looking statements. Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, 2014 and in this quarterly report on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.heronlakebioenergy.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link "SEC Filings", as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this quarterly report on Form 10-Q.

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Based on the nature of the products, services and operations and the expected financial results and expected financial results, we review our operations within the following two separate operating segments: (1) ethanol production; and (2) natural gas pipeline operations. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol, distillers' grains, corn oil and natural gas transportation. Refer to Note 10, “Business Segments”, of the notes to the condensed consolidated unaudited financial statements for financial information about our financial reporting segments.

Ethanol Production

Our primary line of business is the Company’s operation of its ethanol plant, including the production and sale of ethanol and its co-products (wet, modified wet, and dried distillers' grains, non-edible corn oil and corn syrup). These operations are aggregated into one financial reporting segment.

Our ethanol plant has a nameplate capacity of 50 million gallons per year. On July 10, 2015, the Minnesota Pollution Control Agency approved a major amendment to our air emission permit which increased our permitted production capacity from 59.9 million gallons to approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis. We are currently operating above our stated nameplate capacity and intend to continue to take advantage of the additional production allowed pursuant to our permit as long as we believe it is profitable to do so.

Several upscaling projects will be required to increase the plant's current production capacity and take full advantage of the additional production allowed under our amended air permit. One such project includes replacing our existing regenerative thermal oxidizer ("RTO"). We estimate that the total capital commitment for the new RTO will be approximately $1.9 million and have made down payment of approximately $375,000 to secure the equipment order. Once installed, the new RTO will improve emissions control and allow us to continue to maintain applicable regulatory compliance. We expect completion of this project during the latter part of fiscal year 2016.

We have contracted with Eco-Energy, LLC to market all of our ethanol, Gavilon Ingredients, LLC to market our distillers' grains, and Renewable Products Marketing Group, LLC to market our corn oil. We also occasionally independently market and sell excess corn syrup from the distillation process to local livestock feeders. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers.

Our cost of our goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers' grains for sale at our ethanol plant. We generally do not have long-term, fixed price contracts for the purchase of corn. Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

We have a facilities agreement with Northern Border Pipeline Company, which allows us access to an existing interstate natural gas pipeline located approximately 17 miles north from our plant. We have entered into a firm natural gas transportation agreement with Agrinatural, our majority owned subsidiary. We also have an agreement with Constellation NewEnergy—Gas Division, LLC to supply the natural gas necessary to operate our plant.

We have entered into a management services agreement with Granite Falls Energy, LLC, which owns and operates a 60 million gallon per year ethanol plant in Granite Falls, Minnesota. As of July 31, 2015, Granite Falls Energy controls approximately 50.6% of our outstanding membership units. Pursuant to the management services agreement, Granite Falls Energy's chief executive officer, chief financial officer, and commodity risk manager also hold those same offices for the Company. The initial term of the management services agreement expires in July 2016, but automatically renews for successive one-year terms unless either party gives written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

Natural Gas Pipeline

We own a controlling 73% interest in Agrinatural through our wholly owned subsidiary, HLBE Pipeline Company, LLC. Agrinatural is a natural gas distribution and sales company located in Heron Lake, Minnesota that owns approximately 185 miles of natural gas pipeline and provides natural gas to the Company's ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company. Agrinatural's revenues are generated through natural gas distribution fees and sales. The operations of Agrinatural's natural gas pipeline are aggregated into a separate financial reporting segment.

On March 27, 2015, Agrinatural executed a new management and operating agreement with Swan Engineering, Inc. ("SEI"). SEI, together with an unrelated third party owns Rural Energy Solutions, LLC ("RES"), the 27% minority owner of Agrinatural. Under the new management and operating agreement, SEI will continue to provide Agrinatural with day-to-day management and operation of Agrinatural's pipeline distribution business. In exchange for these services, Agrinatural will pay SEI an aggregate management fee equal to the fixed monthly base fee plus the variable customer management fee based on the number of customers served on the pipeline less the agreed monthly fee reduction of $4,500. The new management and operating agreement with SEI expires July 1, 2019 unless earlier terminated for cause as defined in the agreement.

On March 27, 2015, Agrinatural also executed a new project management agreement with SEI. Pursuant to the new project management agreement, SEI will continue to supervise all of Agrinatural's pipeline construction projects. These projects are constructed by unrelated third-party pipeline construction companies. Under the new project management agreement, Agrinatural will pay SEI a total of 10% of the actual capital expenditures for construction projects approved by Agrinatural's Board of Directors, excluding capitalized marketing costs. The new project management with SEI expires June 30, 2019 unless earlier terminated for cause as defined in the agreement.

On March 30, 2015, Agrinatural entered into a restructure agreement with SEI. Pursuant to the SEI restructure agreement, Mychael Swan, the principal of SEI, resigned as the CEO of Agrinatural effective as January 10, 2015. Mr. Swan will continue to serve as the Chairman of the Agrinatural Board of Directors.

On March 31, 2015, Agrinatural entered into a professional services agreement with Wildwood Technology, LLC. Pursuant to the Wildwood Technology agreement, Wildwood Technology will act as the chief financial officer of Agrinatural through the services of its principal, Ann Tessier. Pursuant to the Wildwood Technology agreement, Agrinatural will pay Wildwood Technology $6,000 per month for the services provided by Ms. Tessier. The Wildwood Technology agreement may be terminated at any time upon 30 day prior written notice by either party.

On April 2, 2015, Agrinatural entered into a professional services agreement with Woodbury Consulting, LLC. Pursuant to the Woodbury Consulting agreement, Woodbury Consulting will act as the chief executive officer of Agrinatural, effective as of January 1, 2015, through the services of its principal, John Sprangers. Pursuant to the Woodbury Consulting agreement, Agrinatural will pay Woodbury Consulting $150 per hour for the services provided by Mr. Sprangers plus travel expenses. The Woodbury Consulting agreement may be terminated at any time upon 30 day prior written notice by either party.

Additionally, the Company has entered into two intercompany credit facilities with Agrinatural. Under these credit facilities, the Company agreed to make a five-year term loan in the principal amount of $3.05 million and a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. Details of the Agrinatural credit facilities are provided below in the section below entitled "PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources;Indebtedness".

During the normal course of business, the Company enters into transactions between its two operating segments as a result of the Company's firm natural gas transportation agreement with Agrinatural. These intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions. Consequently, these transactions impact segment performance. However, the revenues and corresponding costs are eliminated in consolidation and do not impact the Company’s unaudited condensed consolidated results.

Trends and Uncertainties Impacting Our Operations

Our results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain commodity prices, especially prices for corn, ethanol, distillers' grains and natural gas; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices and that declining crude oil prices, as well as proposed decreases in the renewable fuel standard volume obligations, will have a significant impact on the market price of ethanol and our profitability over the next twelve months.

The Renewable Fuels Standard

The Renewable Fuels Standard (the "RFS") has been, and we expect will continue to be, a factor in the growth of ethanol usage. The RFS is a national program that mandates increasing amounts of renewable fuels, including ethanol, be blended into the national gasoline supply. The RFS was revised by the EPA in July 2010 to address revisions to the RFS imposed by Congress in the Energy Independence and Security Act of 2007, including setting volume standards for specific categories of renewable fuels including cellulosic, biomass-based diesel, and total advanced renewable fuels and capping the amount of conventional ethanol, such as the corn-based ethanol we currently produce, that can be used to meet renewable fuels blending requirements.

The revised RFS, or RFS2, required that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022. The RFS2 capped the amount of conventional ethanol that can be used to meet the renewable fuels blending requirements at 13.8 billion gallons for 2013, 14.4 billion gallons for 2014 and for 2015 and thereafter, at 15.0 billion gallons. The remainder of the annual blending requirement is to be met by non-corn related advanced renewable fuels such as cellulosic ethanol and biomass-based biodiesel.

The U.S. Environmental Protection Agency ("EPA") can adjust the annual statutory renewable volume obligation ("RVO") in certain circumstances through its rulemaking authority. In November 2013, the EPA issued a proposed rule that would have reduced the 2014 RVO to 1.4 billion gallons below the statutory RVO for 2014. On November 21, 2014, the EPA announced that it rescinded its proposal from 2013. On April 10, 2015, the EPA entered into a consent decree agreeing to a court-enforced timeline for establishing the RFS RVO numbers for 2014 and 2015.

On May 29, 2015, the EPA released a proposed rule containing 2014, 2015 and 2016 RFS RVOs. The comment period on the EPA's proposed numbers ended on July 27, 2015. It is unknown whether the EPA will adjust any of the proposed numbers based on public comment before issuing the final rule.

The following chart illustrates the minimum usage established by the RFS statute and the minimums established in the May 29, 2015 proposed rule:

Year

RVO Source

Total Renewable Fuel RVO

Cellulosic Ethanol Minimum Requirement

Advanced Biofuel

Maximum Amount of Conventional That Can Be Used to Satisfy TotalRenewable Fuel RVO

2014

RFS Statute

18.15

1.75

3.37

14.40

EPA Proposed Rule

15.93

0.33

2.68

13.25

2015

RFS Statute

20.50

3.00

5.50

15.00

EPA Proposed Rule

16.30

1.06

2.90

13.40

2016

RFS Statute

22.25

4.25

7.25

15.00

EPA Proposed Rule

17.40

2.06

3.40

14.00

Although proposed RVO numbers exceed historical production, they are well below the current ethanol supply and production capacity. If the proposal becomes final, the market price and demand for ethanol may decrease unless additional demand from discretionary or E85 blending develops. Beyond the federal mandates, there are limited markets for ethanol. Therefore, any decline in the market price and demand for ethanol resulting from the reduced RVOs could have a material adverse effect on our results of operations, cash flows and financial condition.

Environmental and Other Regulations

Our business subjects us to various federal, state, and local environmental laws and regulations.

Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of nitrogen, hazardous air pollutants and volatile organic compounds. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. When the EPA released its final regulations on the RFS2, the gallons produced by first-generation ethanol plants utilizing corn starch, such as the GFE and HLBE plants, were grandfathered to generate RINs for compliance with the RFS2 at their current authorized capacity of 70 million gallons per year and 59.2 million gallons per year, respectively. However, to generate RINs that qualify for compliance with the RFS2 program, any new production above the grandfathered gallons must meet a threshold of a 20% reduction in greenhouse gas, or GHG, emissions from a 2005 baseline measurement to produce ethanol eligible for the RFS2 mandate.

In September 2014, the EPA announced a new expedited petition process, referred to as the "efficient producer" petition, for existing corn starch and grain sorghum ethanol producers to gain pathway approval and qualify to generate RINs for production volumes above those grandfathered under the RFS2. On January 13, 2015, we submitted an efficient producer petition to the EPA which was approved by the EPA on March 12, 2015. In the approval determination, the EPA's analysis indicated that we achieved at least a 20.1% reduction in GHG emissions for their non-grandfathered volumes compared to the baseline lifecycle GHG emissions.

Pursuant to the award approval, we are only authorized to generate RINs for our plant's non-grandfathered volumes if we can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date of the EPA efficient producer pathway approval) meets the 20% GHG reduction requirement. To make this demonstration, we must develop a compliance plan and keep certain records as specified in the approvals. Additionally, we must register with the EPA as a renewable fuel producer for the non-grandfathered volumes and satisfy the registration requirements, which include completing an engineering study by an independent engineer and a submitting our proposed compliance plan for approval. As of the date of this report, we have completed and submitted the required engineering study and our proposed compliance plan to the EPA for review and approval. Although we believe we will be able to satisfactorily complete the registration process, there is no guarantee that we will complete registration timely or at all, or, even if we do, that we will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement. If we do not complete the required registration or maintain continuous compliance with the 20% reduction in GHG emissions requirement, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced at the plant. As a result, we may be forced to rely on export sales for these non-grandfathered volumes of ethanol, which could adversely affect our operating margins, which, in turn could adversely affect our results of operations, cash flows and financial condition.

Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations. Additionally, any changes that are made to the ethanol plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes.

Other factors that may affect our future results of operation include those risks discussed below and in "Item 1A. Risk Factors" of this quarterly report on Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" of our annual report on Form 10-K for the fiscal year ended October 31, 2014.

Results of Operations for the Three Months Ended July 31, 2015 and 2014

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months endedJuly 31, 2015 and 2014.

Three Months Ended

Three Months Ended

July 31, 2015

July 31, 2014

Income Statement Data

(Unaudited)

%

(Unaudited)

%

Revenues

$

30,192,430

100.0

%

$

39,082,103

100.0

%

Cost of Goods Sold

25,436,496

84.2

%

30,790,088

78.8

%

Gross Profit

4,755,934

15.8

%

8,292,015

21.2

%

Operating Expenses

741,766

2.5

%

777,274

2.0

%

Operating Income

4,014,168

13.3

%

7,514,741

17.2

%

Other Expense, net

(170,441

)

(0.6

)%

(639,121

)

(1.6

)%

Net Income

3,843,727

12.7

%

6,875,620

17.6

%

Less: Net Income Attributable to Noncontrolling Interest

(34,907

)

(0.1

)%

(89,866

)

(0.2

)%

Net Income Attributable to Heron Lake BioEnergy, LLC

$

3,808,820

12.6

%

$

6,785,754

17.4

%

Revenues

Revenues from our ethanol production segment represented approximately 97.8% and 99.8% of our total revenues for the three months endedJuly 31, 2015 and July 31, 2014, respectively. Revenues from our ethanol production segment derive primarily from three sources: sales of fuel ethanol, sales of distillers' grains and sales of corn oil. The remaining revenues from ethanol production are attributable to sales of corn syrup.

Before intercompany eliminations, revenues from our natural gas pipeline segment represented approximately 4.4% and 3.0% of our total consolidated revenues for the three months endedJuly 31, 2015 and July 31, 2014, respectively. After accounting for intercompany eliminations for distribution fees paid by the Company to Agrinatural for natural gas transportation services, Agrinatural's revenues represented 0.2% and 0.2% of our consolidated revenues for the three months endedJuly 31, 2015 and July 31, 2014, respectively.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months endedJuly 31, 2015:

Amount

% of Total Revenues

Ethanol sales

$

22,716,368

75.3

%

Distillers' grains sales

6,539,666

21.7

%

Corn oil sales

761,140

2.5

%

Corn syrup sales

100,957

0.3

%

Agrinatural revenues (net of intercompany eliminations)

74,299

0.2

%

Total Revenues

$

30,192,430

100.0

%

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months endedJuly 31, 2014:

Amount

% of Total Revenues

Ethanol sales

$

31,074,476

79.5

%

Distillers' grains sales

6,872,290

17.6

%

Corn oil sales

914,165

2.4

%

Corn syrup sales

132,198

0.3

%

Agrinatural revenues (net of intercompany eliminations)

88,974

0.2

%

Total Revenues

$

39,082,103

100.0

%

Revenues decreased by 22.7% for the three months endedJuly 31, 2015 as compared to the three months endedJuly 31, 2014 due primarily to decreases in the average prices received for our ethanol and distillers' grains, despite increases in the total volumes of ethanol and tons of distillers' grains sold.

Ethanol

The average price per gallon we received for our ethanol was 32.2% lower for the quarter endedJuly 31, 2015 as compared to the quarter endedJuly 31, 2014. This decrease was partially offset by an increase of 7.8% in the number of gallons sold during the three months endedJuly 31, 2015 as compared to the three months endedJuly 31, 2014 which was due to increased production in the current period.

The fall off in ethanol prices is the result of various factors including but not limited to the demand for ethanol, the spread between ethanol and corn prices and overall gasoline prices and demand. Increased production and an overall decrease in ethanol exports resulted in an increase in domestic ethanol stocks, putting downward pressure on ethanol prices. Ethanol exports have somewhat rallied recently due mainly to lower domestic ethanol prices; however, exports may not continue at their current levels, especially if ethanol prices increase.

Ethanol prices were also depressed by lower gasoline and corn prices. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Further declines in corn and gasoline markets could have a significant negative impact on the market price of ethanol and our profitability particularly unless additional demand can be created in the domestic or foreign markets.

The EPA's reductions in the 2014, 2015 and 2016 RVOs announced in the proposed rules released in late May 2015 also had a negative effect on ethanol prices during three months endedJuly 31, 2015. If finalized as proposed, the rule's reductions in the 2014, 2015, and 2016 RFS RVOs may further reduce demand unless additional demand from discretionary blending develops. Consequently, there could be a negative impact on market prices which could have a material adverse effect on our results of operations, cash flows and financial condition.

Total sales of distillers' grains during the three months endedJuly 31, 2015 were 4.8% less compared to distillers' grains sales during the three months endedJuly 31, 2014. The decline in distillers' grains revenues is primarily attributable to a decrease in the average distillers' grains price of 8.6% for the quarter endedJuly 31, 2015 as compared to the quarter endedJuly 31, 2014. The effect of the decrease in average distillers' grains price was only partially mitigated by a 4.1% increase in the tons of distillers' grains sold during the three months endedJuly 31, 2015 as compared to the same period in 2014.

The market price of our dried distillers' grains generally tracks changes in the price of corn, as market prices for distillers' grains tend to move directionally with the prices of other livestock feed products. Management attributes the decline in the market price of distillers' grains from period to period to a weaker domestic demand due to significantly lower corn prices and domestic livestock feeders switching to other lower priced protein alternatives. In addition, the Chinese market has diminished in recent months. Management anticipates that distillers’ grains prices will remain lower and continue to track corn prices. If we experience further declines in the domestic distillers' grains market or if the Chinese export market stalls further, distillers' grains prices could decrease further.

Corn Oil

Total corn oil sales for the three months endedJuly 31, 2015 were down 16.7% compared to total corn oil sales for the same period in 2014. Management attributes this decline to a 21.4% reduction in corn oil prices for the three months endedJuly 31, 2015 compared to the same period in 2014, which was partially offset by a 5.9% increase in the volume of corn oil sold. Corn oil prices have been impacted by oversupply and lower soybean oil prices, a product that typically competes with corn oil, particularly for biodiesel production. Biodiesel production is a major source of corn oil demand. Management attributes the diminished demand for corn oil from the biodiesel industry due to reduced production by biodiesel plants resulting from the expiration of the biodiesel blenders' tax credit. While the EPA's renewable volume obligation for biodiesel was more favorable than some expected, the lack of the blenders' tax credit has continued to negatively impact biodiesel production. In addition, Management anticipates continued lower corn oil prices unless additional demand can be created.

Cost of Goods Sold

Our costs of goods sold include, among other things, the cost of corn and natural gas (which are the two largest single components of costs of goods sold), as well as processing ingredients, electricity, and wages, salaries and benefits of production personnel.

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months endedJuly 31, 2015:

Amount

% of Cost of Goods Sold

Corn costs

$

19,525,821

76.8

%

Natural gas costs

1,577,479

6.2

%

All other components of costs of goods sold

4,333,196

17.0

%

Total Cost of Goods Sold

$

25,436,496

100.0

%

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months endedJuly 31, 2014:

Our cost of goods sold decreased17.4% for the three months endedJuly 31, 2015 as compared to the three months endedJuly 31, 2014. A significant decrease in natural gas, as well as decreases in corn costs, resulted in the decline in cost of goods sold in the quarter ended July 31, 2015, as compared to the same quarter of 2014. However, cost of goods sold as a percentage of revenues increased for the three month period ended July 31, 2015 compared the same period of 2014 due to the narrowing of the margin between the price of ethanol and the price of corn.

Corn

Corn costs decreased 19.3% for the three months endedJuly 31, 2015 as compared to the three months endedJuly 31, 2014. The decrease in corn costs was primarily due to significantly lower corn prices. In addition, the total volume of corn we processed increased by 7.0% for the three months endedJuly 31, 2015 as compared to the same period of fiscal year 2014 due to increased production in the current period. The decrease in corn prices was primarily driven by the strong corn harvest in the fall of 2013 and 2014 resulting in a significant increase in the supply of corn available to the market, as well as relatively large anticipated corn crop in 2015 and stable corn demand. Management expects there to be an adequate corn supply available in our area to operate the ethanol plant. Corn prices may also be affected by weather, world supply and demand, current and anticipated stocks, and other factors. If corn prices were to increase as a result of such volatility, our ability to generate income may be negatively impacted due to the higher cost of operating our plant.

Natural Gas

Natural gas costs decreased 32.2% for the three months endedJuly 31, 2015 as compared to the three months endedJuly 31, 2014. The decrease in natural gas costs was due to plentiful supply, resulting in lower natural gas prices for the quarter ended July 31, 2015 as compared to the quarter ended July 31, 2014, which had higher natural gas prices due to lingering supply shortages from the harsh winter in 2014. Management anticipates that natural gas prices will continue to hold steady, unless there are major supply disruptions due to production problems or catastrophic weather events, as natural gas production has replenished stock shortages from last year and is currently exceeding demand.

Hedging and Volatility of Purchases

We had gains related to corn derivative instruments of approximately $749,000 for the three months endedJuly 31, 2015, which decreased cost of goods sold, compared to losses of approximately $125,000 related to corn derivative instruments for the same period of 2014, which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Operating Expenses

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Operating expenses for the three months endedJuly 31, 2015decreased4.6% compared to the three months endedJuly 31, 2014. However, due to the decrease in total revenues, operating expenses, as a percentage of total revenues, remained relatively unchanged from period to period, at 2.5% for the three months endedJuly 31, 2015, as compared to 2.0% for three months endedJuly 31, 2014. Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant. We expect that going forward our operating expenses will remain relatively steady.

Operating Income

Our income from operations for the three months endedJuly 31, 2015 was approximately $4.0 million compared to approximately $7.5 million for the same period 2014. This decrease resulted largely from decreased prices for our ethanol and its co-products and the narrowing of our net operating margin.

Other Expense, Net

Other expense, net consists primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense, which was down 75.3% for the three months endedJuly 31, 2015, as compared to the three months endedJuly 31, 2014, is due to our significantly reduced borrowings on our credit facilities.

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2015 and 2014.

Nine Months Ended

Nine Months Ended

July 31, 2015

July 31, 2014

Income Statement Data

(Unaudited)

%

(Unaudited)

%

Revenues

$

87,183,450

100.0

%

$

119,141,711

100.0

%

Cost of Goods Sold

77,906,641

89.4

%

96,066,933

80.6

%

Gross Profit

9,276,809

10.6

%

23,074,778

19.4

%

Operating Expenses

2,404,241

2.8

%

2,460,719

2.1

%

Operating Income

6,872,568

7.8

%

20,614,059

17.3

%

Other Expense, net

(289,092

)

(0.3

)%

(1,407,792

)

(1.2

)%

Net Income

6,583,476

7.5

%

19,206,267

16.1

%

Less: Net Income Attributable to Noncontrolling Interest

(161,563

)

(0.2

)%

(273,010

)

(0.2

)%

Net Income Attributable to Heron Lake BioEnergy, LLC

$

6,421,913

7.3

%

$

18,933,257

15.9

%

Revenues

Revenues from our ethanol production segment represented approximately 99.2% and 99.5% of our total revenues for the nine months ended July 31, 2015 and July 31, 2014, respectively. Before intercompany eliminations, revenues from our natural gas pipeline segment represented approximately 2.4% and 1.6% of our total consolidated revenues for the nine months ended July 31, 2015 and 2014, respectively. After accounting for intercompany eliminations, Agrinatural's revenues represented 0.8% and 0.5% of our consolidated revenues for the nine months ended July 31, 2015 and 2014, respectively.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2015:

Amount

% of Total Revenues

Ethanol sales

$

66,988,983

76.9

%

Distillers' grains sales

17,196,915

19.7

%

Corn oil sales

1,919,849

2.2

%

Corn syrup sales

366,374

0.4

%

Agrinatural revenues (net of intercompany eliminations)

711,329

0.8

%

Total Revenues

$

87,183,450

100.0

%

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2014:

Revenues decreased by 26.8% for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014 due primarily to decreases in the average prices received for our ethanol and distillers' grains.

Ethanol

The average price we received for our ethanol was 28.5% lower for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014. We experienced unusually high ethanol prices during the first nine months of 2014 than the same period of 2015 due to rail logistics issues that plagued much of the ethanol industry during much of 2014, restricting the supply of ethanol in the market and resulting in higher ethanol prices as compared to the same period of 2015.

Distillers' Grains

Total sales of distillers' grains during the nine months ended July 31, 2015 were 21.5% less compared to distillers' grains sales during the nine months ended July 31, 2014. The decline in distillers' grains revenues is primarily attributable to a decrease in the average distillers' grains price of 20.2% for the three quarters endedJuly 31, 2015 as compared to the three quarters endedJuly 31, 2014. The effect of the decrease in average distillers' grains price was slightly enhanced by a 1.6% decrease in the tons of distillers' grains sold during the nine months ended July 31, 2015 as compared to the same period in 2014. Management attributes these lower distillers' grains prices to decreasing corn prices and increasing corn availability.

Corn Oil

Corn oil sales for the nine months ended July 31, 2015 were down 22.8% compared to corn oil sales for the same period in 2014. Management attributes this decline to a 8.4% decrease in the volume of corn oil sold coupled with decrease of 15.7% in the average price per pound sold for nine months ended July 31, 2015 compared to the same period in 2014. The decrease in volume sold for the nine months ended July 31, 2015 is largely attributable to a decrease in the amount of corn oil we produced per bushel of corn used. Management attributes the lower corn oil prices to decreasing biodiesel production and oversupply in the corn oil market.

Cost of Goods Sold

Our costs of goods sold include, among other things, the cost of corn and natural gas (which are the two largest single components of costs of goods sold), as well as processing ingredients, electricity, and wages, salaries and benefits of production personnel.

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2015:

Amount

% of Cost of Goods Sold

Corn costs

$

59,208,293

76.0

%

Natural gas costs

5,777,795

7.4

%

All other components of costs of goods sold

12,920,553

16.6

%

Total Cost of Goods Sold

$

77,906,641

100.0

%

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the nine months ended July 31, 2014:

Amount

% of Cost of Goods Sold

Corn costs

$

69,182,696

72.0

%

Natural gas costs

9,632,558

10.0

%

All other components of costs of goods sold

17,251,679

18.0

%

Total Cost of Goods Sold

$

96,066,933

100.0

%

Our cost of goods sold decreased18.9% for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014. A significant decrease in corn costs and natural gas resulted in the decline in cost of goods sold in the nine months ended July 31, 2015, as compared to the same period of 2014.

Corn costs decreased 14.4% for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014. The decrease in corn costs was due to significantly lower corn prices for the nine months ended July 31, 2015 as compared to the same period of fiscal year 2014, as the total volume of corn we processed increased by 3.5% from period to period. The decrease in corn prices was primarily driven by the strong corn harvest in the fall of 2014, resulting in a significant increase in the supply of corn available to the market.

Natural Gas

Natural gas costs decreased 40.0% for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014. The decrease in natural gas costs was primarily due lower natural gas prices and warmer temperatures for much of the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014.

Hedging and Volatility of Purchases

We had gains related to corn derivative instruments of approximately $753,000 and $207,000 for the nine months ended July 31, 2015 and 2014, respectively, which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Operating Expenses

Operating expenses for the nine months ended July 31, 2015decreased2.3% compared to the nine months ended July 31, 2014. Despite the decrease from period to period, operating expenses, as a percentage of total revenues, increased slightly to 2.8% for the nine months ended July 31, 2015, as compared to 2.1% for nine months ended July 31, 2014.

Operating Income

Our income from operations for the nine months ended July 31, 2015 was approximately $6.9 million compared to approximately $20.6 million for the same period 2014. This decrease resulted largely from decreased prices for our ethanol and its co-products and the narrowing of our net operating margin.

Other Expense, Net

Other expense, net consists primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities. Interest expense, which was down 79.5% for the nine months ended July 31, 2015, as compared to the nine months ended July 31, 2014, is due to our significantly reduced borrowings on our credit facilities.

Changes in Financial Condition for the Nine Months Ended July 31, 2015

The following table highlights our financial condition at July 31, 2015 and October 31, 2014:

Total assets decreased from approximately $66.1 million at October 31, 2014 to approximately $65.3 million at July 31, 2015. This decrease is primarily due to a decrease in net property and equipment of approximately $931,000 at July 31, 2015 compared to October 31, 2014, which was slightly mitigated by an increase in total current assets of $131,000 from period to period. The 1.2% increase to current assets is due primarily to a decrease in accounts receivable of approximately $2.9 million at July 31, 2015 as compared to October 31, 2014. Our trade accounts receivable decreased due to primarily to timing of shipments. Offsetting, the decrease in accounts receivable was an increase of approximately $1.2 million in cash and $1.3 million in inventory at July 31, 2015 compared to October 31, 2014.

Current liabilities totaled approximately $5.9 million at July 31, 2015, a decrease of approximately $2.2 million from October 31, 2014. This decrease was primarily due to a decrease of $4.7 million in our accounts payable at July 31, 2015 compared to October 31, 2014. This decrease is due primarily to lower corn prices during the quarter which reduced the amount of our corn payable at July 31, 2015. Offsetting the decrease in accounts payable was a increase of $2.6 million in checks drawn in excess of bank balance at July 31, 2015compared to October 31, 2014. Our outstanding checks in excess of our bank balance represents any checks that we have issued which have not yet been cashed which exceed the cash we have in our bank account. Checks that we issue are paid from our revolving lines of credit and any cash that we generate is used to pay down our lines of credit with our primary lender.

Our long-term debt increased approximately $4.1 million from October 31, 2014 to July 31, 2015. The increase is due to increased borrowings on our AgStar debt facilities to finance a portion of distributions made to unit holders in January 2015 and an additional $3.5 million in intercompany loans to Agrinatural.

Members’ equity attributable to Heron Lake BioEnergy, LLC decreased approximately $2.9 million at July 31, 2015 as compared to October 31, 2014. The decrease was related to the distribution to members of approximately $9.4 million offset by net income attributable to Heron Lake BioEnergy, LLC of approximately $6.4 million for the nine months ended July 31, 2015.

Noncontrolling interest totaled approximately $1.0 million at July 31, 2015. This is directly related to recognition of the 27.0% noncontrolling interest in Agrinatural at July 31, 2015 and net income attributable to the noncontrolling interest during the nine months ended July 31, 2015.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our credit facility with AgStar. Our principal uses of cash are to pay operating expenses of the plant, to make debt service payments on our long-term debt, and to make distribution payments to our members. We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations for the next twelve months.

We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require additional capital to supplement cash generated from operations and our current lines of credit.

Cash Flows

The following table summarizes our sources and uses of cash from our unaudited condensed consolidated statements of cash flows for the periods presented:

During the nine months ended July 31, 2015, cash flows from operating activities were approximately 69.0% lower, as compared to the nine months ended July 31, 2014 due to a decrease in our net income along with a decrease in accounts receivable and increases in inventory and accounts payable.

Investing Cash Flows

During the nine months ended July 31, 2015, capital expenditures decreased 11.1% for the nine months ended July 31, 2015 compared to the same period of 2014 due to more payments for construction in progress at Agrinatural during the 2014 period. During the nine months ended July 31, 2015, we used cash primarily to purchase a condenser and sieve beads to remediate the system pressure fluctuations we experienced during the first fiscal quarter and make a down payment on the RTO replacement equipment.

Financing Cash Flows

During the nine months ended July 31, 2015, we used approximately $2.7 million in cash in financing activities compared to $16.9 million used for the nine months ended July 31, 2014. This decrease is primarily attributable to $2.6 million from checks in excess of bank balance and $11.5 million in proceeds from long term debt which was used to make payments of $9.4 million in distributions to our unit holders and we also made payment of $7.6 million on our long term debt the nine months ended July 31, 2015. In comparison, we made payments of $16.7 million on our long-term debt and payments of $207,000 on our convertible subordinated debt during the nine months ended July 31, 2014.

Indebtedness

Revolving Term Note

We have a comprehensive credit facility with AgStar Financial Services, FCLA (“AgStar”) which consists of a revolving term loan with a maturity date of March 1, 2022. The credit facility is secured by all of our real property, equipment and other assets. Our credit facility with AgStar is subject to numerous covenants requiring us to maintain various financial ratios.

Under the AgStar revolving term note, we could initially borrow, repay, and re-borrow up to $28.0 million. However, the maximum principal amount of this loan decreases by $3.5 million annually starting on March 1, 2015 and continuing each anniversary thereafter until maturity. Therefore, the amount available under this facility was reduced to $24.5 million on March 1, 2015.

Interest on this loan accrues at 3.25% above the One-Month London Interbank Offered Rate (LIBOR) Index rate. HLBE may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The revolving term loan is subject to an annual fee of 0.5% of the unused portion of this loan. The revolving term loan is also subject to a prepayment fee for any prepayment on the loan prior to July 1, 2016 due to refinancing.

We had approximately $4.4 million outstanding on this loan at July 31, 2015, and $0 at October 31, 2014. The interest rate was 3.44% and 3.41% at July 31, 2015, and October 31, 2014, respectively.

Other Credit Arrangements

In addition to our primary credit arrangement with AgStar, we have other material credit arrangements and debt obligations.

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, the Company and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to the Company if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. There was a total of approximately $2.1 million and $2.3 million in outstanding water revenue bonds at July 31, 2015 and October 31, 2014, respectively . We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

To fund the purchase of the distribution system and substation for our ethanol plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note the Company is required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan was approximately $163,000 and $219,000 at July 31, 2015, and October 31, 2014, respectively.

We financed our corn oil separation equipment from the equipment vendor. We paid approximately $40,000 per month on this debt, conditioned upon revenue generated from the corn oil separation equipment, including implicit interest of 5.57%. This loan was set to mature in May 2015. We paid the balance of this loan in full during the quarter ended April 30, 2015.

We also have a note payable to the minority owner of Agrinatural in the amount of $300,000 at July 31, 2015 and October 31, 2014. Interest on the note is One-Month LIBOR rate plus 4.0% and the note is due on demand.

Loans to Agrinatural

Original Agrinatural Credit Facility

On July 29, 2014, the Company entered into an intercompany loan agreement and related loan documents with Agrinatural (the "Original Agrinatural Credit Facility"). Under the Original Agrinatural Credit Facility, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

On March 30, 2015, we entered into an allonge (the “Allonge”) to the July 29, 2014 note with Agrinatural. Under the terms of the Allonge, the Company and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately $3.06 million, defer commencement of repayment of principal until May 1, 2015, decrease the monthly principal payment to $36,000 per month and shorten maturity of the Original Agrinatural Credit Facility to May 1, 2019.

Interest on the Original Agrinatural Credit Facility was not amended and continues to accrue at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect.

In exchange for the Loan Agreement, the Agrinatural executed a security agreement granting the Company a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning the Company all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the minority owner of Agrinatural ("RES"), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to the Company.

The balance of this loan was approximately $2.9 million at July 31, 2015 and $3.05 million at October 31, 2014.

Additional Agrinatural Credit Facility

On March 30, 2015, the Company entered into a second intercompany loan agreement and related loan documents (the "Additional Agrinatural Credit Facility") with Agrinatural. Under the Additional Agrinatural Credit Facility, the Company agreed to make a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Prior to May 1, 2015, Agrinatural is required to pay only monthly interest on the term loan. Commencing May 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on May 1, 2019.

In exchange for the Additional Agrinatural Credit Facility, the Agrinatural executed a security agreement granting the Company a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning the Company all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the minority owner of Agrinatural ("RES"), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to the Company under the Additional Agrinatural Credit Facility.

The balance of this loan was approximately $3.4 million at July 31, 2015.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies summarized in Note 1 to our condensed consolidated unaudited financial statements included with this quarterly report on Form 10-Q.

At July 31, 2015, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with AgStar. The specifics of these credit facilities are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness.”

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period.

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers' grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of July 31, 2015, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The results of this analysis, which may differ from actual results, are as follows:

Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)

Unit of Measure

Hypothetical Adverse Change in Price as of

Annual Adverse Change to Income

July 31, 2015

Ethanol

60,994,000

Gallons

10.00

%

$

8,539,000

Corn

17,731,800

Bushels

10.00

%

$

5,798,000

Natural Gas

1,600,000

MMBTU

10.00

%

$

452,000

Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, our Chief Executive Officer, Steve Christensen, and our Chief Financial Officer, Stacie Schuler, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2015. In making this evaluation, our management considered the matters relating to the previously reported material weaknesses at Agrinatural, our majority owned subsidiary, discussed below. As of July 31, 2015, the material weaknesses in internal controls at Agrinatural are not fully remediated. Therefore, our Chief Executive Officer and Chief Financial Officer have concluded that our consolidated disclosure controls and procedures were not effective as of July 31, 2015 due to the potential effect of the material weaknesses at Agrinatural.

Changes in Internal Control over Financial Reporting

In our Annual Report on Form 10-K for the year ended October 31, 2014, we reported that during the fourth quarter of fiscal year 2014 and the first quarter of fiscal year 2015, our management determined that internal controls over the accounting, financial reporting and oversight at our majority owned subsidiary, Agrinatural Gas, LLC, were not effective, and that the magnitude of these weaknesses could be material enough to affect our internal control over our consolidated financial reporting. We are currently developing, and in some cases have begun implementing, the remediation activities we believe are necessary to address these weaknesses at Agrinatural. We anticipate that these additional procedures will be fully developed and implemented by the time we file our annual report on Form 10-K for the fiscal year ended October 31, 2015.

As part of the preparation of this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (1) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made not misleading with respect to the period covered by this report, and (2) the financial statements, and other financial information included in this

report, fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in accordance with United States GAAP.

Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the quarter ended July 31, 2015. Other than as described above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter ended October 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

Item 1A. Risk Factors

The risk factors below should be read in conjunction with the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended October 31, 2014. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

The ethanol industry is dependent on government usage mandates affecting ethanol production and any changes to such regulation could adversely affect the market for ethanol and our results of operations.

The domestic market for ethanol is significantly impacted by federal mandates for blending ethanol with gasoline. Future demand will be largely dependent upon the economic incentives to blend based upon the relative value of gasoline versus ethanol, taking into consideration the relative octane value of ethanol, environmental requirements and the RFS2 mandate.

On May 29, 2015, the EPA released a proposed rule that would reduce the RFS2 levels for 2014, 2015, and 2016 to approximately 15.9 billion gallons, 16.3 billion gallons, and 17.4 billion gallons, respectively, and reduced the renewable volume obligations that can be satisfied by corn-based ethanol to 13.3 billion gallons, 13.4 billion gallons, and 14.0 billion gallons, respectively. While the EPA's May 2015 proposed RVO standards do increase over time, they also fall significantly short of statutory requirements and the reductions from the statutory volumes were greater than what many in the industry anticipated. Further, due to the lower price of gasoline, we do not anticipate that renewable fuels blenders will use additional gallons of ethanol beyond what is required by the RFS which may result in a significant decrease in ethanol demand. Unless additional demand is created through discretionary blending, this departure by the EPA from the statutory requirements. If the market price and demand for ethanol decreases as expected, we could experience a material negative impact on our operating performance and financial condition.

Meeting the requirements of evolving environmental, health and safety laws and regulations, and in particular those related to climate change, could adversely affect our financial performance.

Our plant emits carbon dioxide as a by-product of the ethanol production process. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. When the EPA released its final regulations on RFS2, these regulations grandfathered our plant at its current production capacity for the generation of RINs for compliance with RFS2. Any expansion of our plant beyond the grandfathered volumes must meet a threshold of a 20% reduction in GHG emissions from a 2005 baseline measurement for the ethanol to be eligible to generate RINS for compliance with the RFS II mandate.

During the second fiscal quarter of 2015, our plant was awarded “efficient producer” status under the pathway petition program for the non-grandfathered volumes of ethanol produced at our plant. Pursuant to the award approval, we are only authorized to generate RINs for our non-grandfathered volume if we can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date EPA efficient producer pathway approval) meets the 20% GHG reduction requirement.

Although we believe our plant will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement as presently operated, there is no guarantee that we will not have to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with the efficient producer requirements or other future law or regulation. Continued compliance with the efficient producer GHG reduction requirements or compliance with future law or regulation of carbon dioxide, could be costly and may prevent us from operating our plant as profitably, which may have an adverse impact on our operations, cash flows and financial position.

If we fail to comply with the 20% reduction in GHG emissions requirement, we will not be able to generate RINs for our non-grandfathered volumes of ethanol, which could adversely affect our operating margins.

We expect that nearly all of the anticipated demand for our ethanol production will be by customers obligated to comply with the RFS. The EPA's approval of our efficient producer petitions requires that the plant demonstrates continuous compliance with the 20% reduction in GHG emissions for all volumes of ethanol produced, not just non-grandfathered volumes of ethanol. If we cannot show continuous compliance with the requirement for all volumes of ethanol, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced. If our ethanol production does not meet the requirements for RIN generation as administered by the EPA, we may be required to sell those gallons of ethanol without RINs at lower prices in the domestic market to compensate for the lack of RINs or sell these gallons of ethanol in the export market where RINs are not required, which could adversely affect our results of operations, cash flows and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are included in this report:

Exhibit No.

Exhibit

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.*

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